Canadian HELOC borrowings skyrocket, worrying experts

Borrowing against the value of your home can be a great tool, but also a big risk.

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When the pandemic struck, it opened a window of opportunity for millions of Canadians struggling with debt to get their finances under control.

And while many have used the time to pay off what they owe, there is one category of debt that exploded last year: mortgages.

Apart from new home purchases, second mortgages in the form of HELOCs (Home Equity Lines of Credit) have become increasingly popular.

The volume of new HELOCs created increased 56.7% in the second quarter of 2021 compared to the same period a year earlier, according to a report from Equifax, the consumer information agency. This is the highest volume recorded over the past 10 years.

And the credit bureau Fitch Ratings recently released a report indicating that increasing household debt, including mortgages, could cause problems for Canadians in the future.

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This is because these loans can be a slippery slope – and any quick move on the part of the government can cause borrowers to lose their foothold.

HELOCs are a type of renewable guaranteed loans

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HELOCs are a great borrowing tool for homeowners to tap into their home equity. There is nothing wrong with taking one out – in fact, if borrowers are confident that they will only borrow what they can afford to repay, they will have a hard time finding better interest rates. with another type of loan.

One of the advantages of HELOCs is that you can remove one without ever using it. They work much like credit cards, which are another form of revolving credit. And like credit cards, borrowers only pay interest on the amount of credit they use. Besides, there are even free online services that allow you to compare HELOC loans available to you at no cost.

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Here’s how it works: Homeowners can borrow up to 65% of the purchase price of their home. But the amount of money that individuals can access depends on the amount of equity they have.

Together, what you still owe on your mortgage and HELOC combined cannot exceed more than 80 percent of your home’s value.

Suppose you borrowed $ 450,000 to buy your house and it is now worth $ 500,000. You still owe a balance of $ 300,000, which means there is $ 200,000 of equity in the house.

This means that you can theoretically borrow up to $ 292,500 (65% of the purchase price of your home). But since your mortgage and HELOC combined can’t exceed 80% of your home’s value, you’ll only have access to $ 100,000.

As you pay off your mortgage balance, you will have access to more equity to borrow. Other factors like your credit score will also affect the amount you can borrow with a HELOC. If you don’t know your credit score, you can check it for free.

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Borrowing with a HELOC can be risky, but it depends

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Another advantage of HELOCs is that they do not come with fixed refunds. However, interest will accrue on what you borrow, until you pay off the balance.

One of the risks is that HELOCs usually carry variable interest rates. This means that when rates go up, borrowers’ monthly payments could increase dramatically.

Inflation is on the rise, which could lead the Bank of Canada to raise interest rates earlier than expected – some speculate that could happen as early as 2022.

There is another factor at play here that could make HELOCs a risky financial move for some: Home values ​​have skyrocketed this past year.

This may lead some homeowners to borrow as this trend will never stop. But when it is unavoidable, they can seriously end up in the hole.

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And because their homes are pledged, more than their wealth is at stake.

How to tell if you’ve taken on too much debt

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If interest rates suddenly rise, families with large mortgage payments and other debts could quickly find themselves in debt distress.

“In 2018, when interest rates rose, we saw a decline in credit card payments, especially among consumers with a HELOC. It has also led to an increase in the number of bankruptcies among older consumers with HELOCs, ”said Rebecca Oakes, assistant vice president of advanced analytics at Equifax Canada, in a statement.

And banks will likely adjust their rates within hours or days of the central bank announcing a rate change.

What does it look like? The National Bank’s interest rates on HELOCs are preferential (the interest rate that big banks charge their customers) plus one. Since the prime rate is currently 2.45%, your loan will carry an interest rate of 3.45%.

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The Bank of Canada is expected to raise rates by 0.5% as of April 2022. That would bring your interest to 3.95%.

If you withdraw $ 30,000 from your HELOC to pay for a home improvement project that you intend to pay off over three years, you’ll pay $ 7 more in interest each month.

It might not seem like much, but it’s $ 84 more per year. If your budget is already stretched, it can be easy to fall behind on payments.

How to decide if a HELOC is right for you

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Whether you need to take out a personal loan or a HELOC depends on several factors.

If you are earning a stable income and need a fixed amount, such as for a home improvement project, a personal loan may be your best option. You will have set payments with a fixed interest rate and always know what you owe each month. There is something to be said for this certainty.

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But if you strength need money for an emergency someday a HELOC might be right for you. It’s free to see quotes for the best HELOC opportunities available to you

If you’re looking for borrowing options, there are some things the Financial Consumer Agency of Canada advises borrowers to do when it looks like interest rates could rise.

  • Make sure you have an emergency fund in place. Reduce your expenses so you have more money on hand to deal with debt.
  • Borrow only what you can afford to repay, which is often a fraction of the amount you can borrow.
  • Find out if taking on more debt is hurting your savings goals, and make sure you have a high interest savings account.
  • Find ways to earn a little extra income – potentially by engaging in a profitable side business.
  • Treat your debts with the highest interest rates first, possibly consolidating them into a personal loan at a lower interest rate.

This article was created by Wise Publishing. Wise is dedicated to providing information that helps readers navigate the complex landscape of personal finance. Wise only associates with brands that he trusts and that he believes can be of use to the reader. This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

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